“There is . . . no historical data to demonstrate that a balanced budget enhances gross domestic product or any other indicator of economic productivity . . . On six consecutive occasions from 1817 until 1930, when government cut spending considerably without simultaneously seeking to stimulate the economy with equally deep
tax
cuts . . . depressions arose.” Michael Johns, The World and I, April 1996 “If we choose wisely, we can pay down the debt, deal with the retirement of the Baby Boomers, invest more in our future and provide
tax
relief.” President Clinton, January 18, 2001. [The
recession began shortly afterward, only to end with the Bush federal budget deficits. As a result of those deficits, the economy grew.]
Had anyone in 1980 announced that in sixteen years the U.S. federal debt would increase more than 500%, most experts would have predicted rampant
inflation,
depression, default on debt and the destruction of the world's financial system.
Experts in 1980 would have used the same arguments they now use when they bemoan the current federal budget deficit and debt. They would have been the first to demand a federal surplus. Yet:
1) The federal debt rose more than 500% in sixteen years.
2) We did not have rampant
inflation.
Our
inflation
was as modest as the Federal Reserve wanted it to be.
3) We did not experience a depression, a default or the destruction of the world financial system. Our economy grew massively, along with federal deficits.
4) To legislate a balanced federal budget is to legislate against the creation of money.
5) Our economy today, being larger and stronger than it was sixteen years ago, has and must have more money than it did then.
What would our economy be today if we had eliminated the federal budget deficit sixteen years ago? We would have had a depression, for lack of
money.
Federal surpluses have been associated with every
depression
in American history. (See below.)

With a surplus, the U.S. government spends less than it receives. On net, the government destroys
money
and eliminates the Federal Budget Deficit.
With no federal budget deficit, the total real value of existing money declines due to inflation. If our economy contained $5 trillion dollars tomorrow and forever, even the most minuscule inflation would cause those $5 trillion to have a real worth of less than $5 trillion.
With an inflation of only 2%, those $5 trillion would be worth, in constant dollars, $4.9 trillion in one year. After sixteen years, our economy would contain only $3.6 trillion in constant dollars.
We are geared to inflation. Experts feel a small amount of inflation creates the beneficial illusion that salaries and real-estate values are increasing.
If the real value of all the money in our economy declined, the entire economy would decline, and in a short time, we would enter a depression. It happened in the Great Depression. Workers lost their jobs. Businesses lost their profits. The value of real estate plunged -- all this from a federal surplus.
Taxes
result from salaries, business profits and real estate holdings. A
recession
or depression causes
tax
collection to decline. If the federal government were not allowed to create money via a federal budget deficit, it could not pay its bills as
tax
revenues declined.
The government would be forced to increase
tax
rates, which further would destroy our economy. The federal government would go bankrupt, thanks to its balanced budget.
A federal surplus will be even worse.

Compare the above economy to an economy that increases its money supply 500% in sixteen years, with the same 2% inflation. That economy would contain a real $18 trillion. In constant dollars, is a $3.6 trillion economy as strong as an $18 trillion economy? Obviously not.
What will happen to the U.S. economy if the federal budget deficit causes the federal debt
to rise 500% in the next sixteen years? History shows we will continue to have whatever modest level of inflation the Federal Reserve wants, no depression, no default and no destruction of the world financial system. Our economy will grow larger and stronger than it is today. And yes, we will have more lending capital than ever.
Will the U.S. government service the $25 trillion debt it would have in sixteen years? Yes. The U.S. always repays its debts, right on schedule (unless Congress gets into a political hissy-fit of ignorance, as it sometimes has in the past, and refuses to approve a higher federal debtceiling).
The U.S. repays its debts with U.S. dollars, the same money you use to repay your debts. Because U.S. dollars are credit, the U.S. repays its debt with credit/money, the only money in existence. To create credit/money, the government must create a federal government deficit.
To service a growing debt requires an accelerated creation of money. Borrowing begets borrowing at a growing rate because of the need to cover interest. When the government borrows one dollar, it must pay back more than one dollar.
At current interest rates, and no change in spending or
taxes,
the U.S. federal debt would double in less than sixteen years. The government easily will service that debt.
A 4% inflation, against the total debt/money supply of $20 trillion, costs us $800 billion in real money, annually. Today's (2008) 1% population growth costs us another $200 billion in per capita real money. Include the $800 billion current account deficit, and the money supply must grow $1.8 trillion, or 9% just to break even – that is, for a no-growth economy.
In 2007, total debt/money growth was $7.5%, which was less than necessary for ongoing zero growth. In short, the economy has become starved for money (aka "credit crunch"), which is the root of today's problems and leading us into a
recession or worse.
As our population grows and ages, many more people will require Social Security and Medicare payments. We have had a long period of relative peace and the end of the cold war. Though these conditions have allowed for a reduction in military spending, the situation will change.
It is unlikely the government will be able to limit its expenditures and to accomplish no more in future years than it does now.

Stop and Think: A shrinking federal debt reduces the amount of money the federal government creates. Can the economy grow if the federal debt shrinks?
For about twenty years after World War II, the federal budget deficit averaged $0, so the federal debt remained flat, decreasing in certain years, while increasing in others. Yet the economy grew.
Question: How was this possible?
Answer: Federal debt is one part of total debt. At the end of World War II (1945) federal debt amounted to about 62% of total debt. We also had consumer debt, business debt and non federal (state, county, city, park district, school board, etc.) debt.
During the post World War II period, non federal debt rose substantially. Twenty years after World War II, federal debt amounted to only 26% of total debt. The rise in total debt supported the growing economy.
Graphs showing average annual changes in total debt and Gross Domestic Product reveal that the two tend to move together.

The best solution is to eliminate the federal budget deficit and debt altogether, not by paying the debt down, but by ending the government practice of borrowing. The government does not need to borrow money, because the government has the unlimited ability to create money without borrowing. The process would be:

Congress would create an account called "Money."

Congress arbitrarily would fund this account by fiat. That is, Congress merely would determine how much money this account contains. The process would be similar to the way Congress now determines the debt ceiling.

Federal agencies would write checks against this account according to budgets decided by Congress. If any federal agency needed additional funds, Congress would decide whether or not to allow this spending, in the same way that Congress votes for additional spending by the military et al.
There would be no need for federal borrowing, which would eliminate concerns about "our grandchildren paying for the federal debt." There would be no federal debt.
To see a complete discussion of the federal budget deficit and the historical effect it has had on the U.S. economy, please see
FREE MONEY.